A servicing manager wants to charge a $95 processing fee when PMI comes off at the scheduled 78% point, since staff have to touch the file. A compliance analyst objects to the whole framing. Why?
Correct Answer
D) Automatically terminate PMI at 78 percent if current
Why this is correct: The Homeowners Protection Act (HPA) requires servicers to automatically terminate PMI on the date the principal balance is first scheduled to reach 78% of the original value, based on the initial amortization schedule, provided the borrower is current on payments. The correct answer, "Automatically terminate PMI at 78 percent if current," accurately states this core HPA rule. Why the other choices are wrong: "Treat government mortgage insurance as conventional PMI" is wrong because loans with government mortgage insurance (e.g., FHA, VA, USDA) are explicitly excluded from HPA coverage. "Use the secondary-market delivery standard to decide the HPA PMI Disclosures issue before confirming the trigger facts" is wrong because secondary-market rules (like those for Fannie Mae) are separate; HPA's automatic termination is a statutory requirement based on specific loan facts. "Apply PMI cancellation rules to a loan product outside the covered PMI rule" is wrong as it would misapply HPA to a loan it does not govern, such as a government-insured loan. Exam tip: Remember the automatic termination trigger is based on the original amortization schedule hitting 78%, not the current appraised value. Borrower-requested cancellation at 80% is a separate, earlier option.
Why This Is the Correct Answer
The correct response is "Automatically terminate PMI at 78 percent if current" because HPA has separate borrower-requested, automatic, and final PMI termination rules.
Why the Other Options Are Wrong
Option A: Treat government mortgage insurance as conventional PMI.
Treat government mortgage insurance as conventional PMI. is not correct because it does not apply the rule tested by this file scenario.
Option B: Use the secondary-market delivery standard to decide the HPA PMI Disclosures issue before confirming the trigger facts.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Option C: Apply PMI cancellation rules to a loan product outside the covered PMI rule.
Apply PMI cancellation rules to a loan product outside the covered PMI rule. is not correct because it does not apply the rule tested by this file scenario.
Memory Technique
Homeowners Protection Act PMI rules: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
Match the file facts to Homeowners Protection Act PMI rules; do not choose an exception or shortcut that skips the required rule.
Common Mistakes to Avoid
- -Choosing an internal exception instead of the governing rule
- -Treating preliminary or informal facts as a substitute for required documentation
- -Answering from a familiar but unrelated mortgage topic
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